New Homes Can’t Compete With Foreclosures

By AnnaMaria Andriotis

Discounted prices. Closing credits. Flashy appliances. Home builders tried throwing everything — including the kitchen sink — at buyers in an attempt to boost new home sales. But for many buyers, new homes still can’t compete with existing properties that get cheaper by the month.

According to new figures released this morning from the S&P/Case-Shiller Home Price Indices, prices fell for the fifth straight month in January and are down about 4% compared to a year ago. As a result, the price difference between new and existing homes keeps growing bigger. The median price of new homes sold last month was $233,700 compared to $157,100 for existing homes. That $76,600 difference is up 27% from last year and up 57% from 2010, according to the National Association of Realtors. In fact, since 2006, the price gap has more than tripled.

The driving force behind this trend is all the foreclosure and short sales that sell at substantially discounted prices, experts say. For the buyer, purchasing an existing home means making a smaller down payment and signing up for a smaller loan than they would with a new home. “Faced with a choice, few people are going to pay extra just to be the first person to live in a home,” says Leonard Baron, principal at LPB Services, a real estate consulting firm in San Diego, Calif.

To be sure, new home sales are improving slowly. While they fell 2% from January to February, they’re up 11% compared to February 2011, according to the Commerce Department. But their current annualized pace of 313,000 sales last month falls short of pre-downturn figures. In a healthy housing market roughly one million new homes sell each year.

Hoping to restore the appeal of new homes, builders are offering buyers a new wave of deals. For instance, Land Development and Building rolled out incentives last week in an attempt to sell off new cottage homes in Carmel, Ind. They’re offering up to $7,000 that buyers can apply toward closing costs, new home furnishings or a completed basement, among other enticements. (Homes are normally sold with unfinished basements.) “With the market starting to strengthen, we want to create a program to get some of those buyers who are on the fence to purchase a home,” says a company spokeswoman.

Separately, builder K. Hovnavian Homes announced this week that it’s working on seven new “value-priced” townhome communities in New Jersey and Pennsylvania, touting their affordable sticker prices. The pricing is largely meant to entice renters to buy, says Randy Brosseau, the company’s northern New Jersey president. He says a comparable rental property would cost more per month than the new homes, which start as low as $300,000 in some markets.

Luxury home builders are also rolling out new deals. In San Diego, Newland Communities offers incentives on the remaining high-end homes in its “4SRanch” neighborhood. Prices start at around $651,000, including a $10,000 flooring credit. And last month, Weber Homes slashed starting prices on luxury homes in Mountain Lakes, N.J. from $1.32 million to $980,000. Of the 20 homes that hit the market roughly a year ago, 14 are still on the market, says Chris Fry, a sales manager for the company.

Beyond upfront cost-saving initiatives, builders are touting savings associated with living in the home. Hovnavian is marketing its new communities’ proximity to public transportation, for instance. Lennar over the past few years has been touting its energy-efficient homes that reduce owners’ monthly energy bills; the company today reported a 33% increase in new home orders for the first quarter. David Crowe, chief economist at the National Association of Home Builders, says builders are trying to appeal to buyers by addressing their energy-costs concerns within the home as well as their commute to work.

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